‘Eliminate different debts for the best results’: With varying interest rates and liquidity concerns, what’s the best strategy for paying down debt?

Hi Money Minder,

Closing on a house sale this Friday and looking at around 24.5k coming in. Here’s the breakdown of my current debts:

• Current home loan at 7% – owe about 300k, paying $2800 monthly
• Partner’s car loan at 13% – owe about 9k, paying $380 monthly
• My car loan at 4% – owe about 25k, paying $700 monthly
• My student loans – about 27k remaining, with a 7% average, paying $300 monthly

No credit card debt, maxing out IRA and HSA, and as a small business owner, no 401k to dump extra money into. Thinking about opening a Simple IRA later this year. Debating between investing or paying off debts due to interest rates. Normally, would tackle the highest interest rate first (partner’s car), but tempted to pay off larger car loan for lower interest rate and then aggressively tackle 13% loan. What do you think is the best move here?

Thanks for your help!

Response from THE MONEY MINDER:

Hello There,

Hey folks,

Congratulations on closing the sale of your house! It sounds like you have a significant amount coming in from the proceeds. Taking a look at your current debts, it seems like you have a solid handle on your financial situation, especially with no existing credit card debt and maxing out your IRA and HSA annually.

Given the interest rates on your partner’s car, your car, and student loans, it’s understandable why you’re torn on where to allocate your funds. While the highest interest rate debt typically makes the most sense mathematically, liquidity and cash flow considerations come into play.

In this situation, considering wiping out the larger car payment to free up more cash flow and then aggressively paying down the 13% loan could be a practical approach. By reducing the monthly payment on the larger car loan, you can allocate those funds towards the higher interest partner’s car loan, potentially saving you more in interest payments in the long run.

Ultimately, it’s important to consider both the interest rates and the impact on your monthly cash flow when deciding where to allocate your funds. Evaluate which approach aligns best with your financial goals and comfort level. It might be beneficial to run the numbers with a financial advisor to see the long-term implications of each strategy.

Best of luck with your decision, and feel free to reach out if you need further assistance.

Farewell from THE MONEY MINDER.